Brexit and Fraud Drive UK Payments Agenda

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Ed Adshead-Grant, General Manager, Payments, Bottomline Technologies 

This year is proving to be momentous for UK accounting and finance professionals.

The day-to-day governance and processes involved in running a business–already a full-time job–are colliding with a series of unprecedented political, economic and regulatory tailwinds that will transform the future trading of UK businesses.

Topping the challenges facing businesses are the innumerable implications of the UK Government’s decision to leave the European Union (“Brexit”).  This is coupled with changes across the banking sector including Open Banking and Europe’s Second Payment Services Directive (PSD2). Simultaneously, businesses are facing increased risks from fraud and greater demands to meet customers’ expectations of faster, real-time services. It’s a lot to think about if you’re holding the purse strings of any active UK business.

In order to understand more about these concerns and the regulatory factors shaping the payments industry, Bottomline Technologies recently published its third annual report:UK Business Payments Barometer: Payments For a New Economy. Bottomline surveyed 400 financial decision-makers across the UK, ranging from small to medium enterprises (SMEs) employing less than 250 people, up to larger organisations employing more than 10,000 people. The Report uncovered some revealing attitudes toward business payments.

Ed Adshead-Grant
Ed Adshead-Grant

It’s not surprising that the leading concern for most businesses in 2018 is Brexit. While the issue of security topped the chart of “drivers of change” in 2016 and 2017, the UK Government’s decision to leave the European Union at the end of March 2019 revealed itself as the number one most pressing business concern this year.

With just months left until the expected departure from the EU, UK businesses are clearly nervous about how they will trade with the country’s closest economic neighbours. Of the respondents surveyed, 29% cited Brexit as their greatest concern. The second biggest concern, represented by 18% of respondents is security and fraud prevention.

The UK payments’ regulation is based on EU legislation so has enjoyed the benefits of treating payments harmoniously across the EU.  With the UK’s planned exit from the European Union, the UK may lose its automatic access rights to operate with a single market payment scheme –such as the Single European Payments Area (SEPA).Owing to Brexit, businesses may experience more complexity, slower settlement times and higher fees on euro cross-border payments initiated from UK-based bank accounts. The position remains unknown and ambiguous. 

Hands in the till

According to 60% of respondents, external cyber fraud continues to grow as the biggest threat to businesses, small and large. One particularly worrying trend emerging from this year’s Report is a growing concern about internal fraud.The Survey revealed that while the number of companies that have experienced fraud has declined slightly from 2017, it remains a major concern for businesses, in particular, the rise of employee fraud. Fears over staff with their hands in the till are up significantly, with a 169% increase since 2016.

In addition to internal fraud, businesses have to worry about outsiders that exploit staff and internal payment processes. According to the research data, the two biggest growth areas in fraud concern, were the internal exploitation of systems and controls — reported to be a worry for 13% of respondents in 2016, now up to 35% just two years later.On the external exploitation of internal staff, that number was up from 14% to 30% during the same period. With more than half of internal fraud committed by trusted senior managers, it is fair to conclude that businesses need to be more vigilant.

The Survey results showed that of those affected by financial fraud, most were unable to calculate how much money they lost. For those that could, the majority (at 27%) were unable to recover between £10,000 and £50,000. Even more shocking, 9% lost between a quarter of a million and a million pounds and 2% lost more than £1 million. It’s a stark statistic that two thirds of the companies impacted by fraud were unable to recover more than 50% of the stolen funds.

Open Banking revolution

While Brexit is dominating much of the discussion in the UK, the starting gun has been fired on regulations which promise to radically alter the payments and banking landscape well into the future. The UK’s Open Banking and Europe’s PSD2 will liberalise banking and increase competition, enabling smaller fintech companies and new banks to compete with traditional banks. Businesses can expect to see more innovative solutions available on the market that are cheaper,real-time and coupled with a greater number of financial products designed to fit the requirements of today’s digitally-focused customers.

When it comes to the facilitation of payments, there are even more changes afoot. The New Payments Architecture currently being designed for the UK, following hot on the heels of Open Banking, will make instant payment processing the new normal. Meanwhile, upcoming initiatives such as Request to Pay will see the introduction of sophisticated electronic invoicing into the payment system, making it easier for businesses to pay and get paid for goods and services and to reconcile all the incoming data.

Late payment pain 

Although ethically questionable,it has been a fact for many large companies that they can manage their cashflow by delaying payments. Yet late payments can cripple small businesses which have less ofa financial cushion and depend on accurate and timely cashflows.

In 2017, Bottomline Technologies quizzed financial decision makers on why they thought their invoices were being paid late. The result was 38% claimed that slow payer ethic was their single greatest challenge to getting their invoices settled, with almost half of respondents from SMEs citing this to be their biggest issue.

This year the Survey focused on asking financial decision makers why they were paying their suppliers late – and to gauge the impact of new legislation on improving payment times. On top of the Prompt Payments Code, last April, the UK Government’s Duty to Report (DTR) has come into effect. DTR is a statutory regulation for larger businesses (those over 250 employees, £36m turnover or £18m on the Balance Sheet) that compels them to publish information on their payment practices and performance, including the average time taken to pay supplier invoices.

While DTR was introduced to tackle delayed payments, has the attempted clampdown on poor practices had any effect?Unfortunately, the answer is “not yet”. According to the Report, 38% of companies admit to paying their suppliers late to protect liquidity, rising to 44%when large companies were asked the same question.  Although customary payment habits take time to change, the new regulation is expected to make a difference in the next couple of years.

Whilst late payments continue to plague small businesses, there are some promising signs regarding the adoption of Faster Payments. The number of businesses adopting Faster Payments for their regular business payments has increased from 12%to 56% since last year, taking the user base for same-day payments to the majority of those interviewed. 

Innovation, innovation, innovation

Another key trend shaping UK business investment is new technology and automation.The Report showed 48% stating the main reason for the investment is to improve customer and user experience. Fraud detection and prevention followed at 45%. In fact, one in three respondents said their company was investing in technology with the expectation that it will enable more secure payments.

Whilst SMEs and corporates indicated a 33% year-over-year increase in cloud migration, the largest enterprises appear to be focused on using bank-agnostic technology and are working hard to eradicate manual processes, improve customer experience, increase fraud detection and consolidate systems.This may suggest larger organisations are gearing up for the increased competition and transaction volumes expected with the dawn of Open Banking.

These are the unprecedented drivers of change shaping the future of UK business payments. Navigating these regulatory and technical tail winds is creating a time of change for many UK businesses if they want to remain competitive. The key to overcoming these challenges is to make sure businesses can get paid on time by using efficient and modern processes that manage workflows securely and effectively.  Don’t expect your existing payment operations to be fit for purpose beyond 2018 without an informed review.